Was Bernanke Trespassing On Treasury’s Fiscal Turf?

Posted by Tom Lindmark on June 3rd, 2009

Felix Salmon took umbrage with some of Bernanke’s testimony this morning. He seems to think that the Fed Chairman is stepping on Treasury’s turf.

This is reasonable enough: after having hit the zero bound, there’s not much which can be said about monetary policy, and fiscal policy is going to be the main driver of America’s standing in the international financial markets going forwards. What’s more, for the past couple of years the Fed has been working hand-in-glove with Treasury: the distinction between fiscal and monetary policy, and the independence of the central bank, have gone by the wayside (quite properly, I might add, contraAngela Merkel) in a time of crisis.

Still, it’s a little disconcerting to see the Fed chairman talk so freely about fiscal policy: now we’ve reached this point, it’s going to be hard to stop him talking this way, even after the crisis is over. And the distinction between the Fed chairman and the Treasury secretary is a useful one, which really should be maintained.

I appreciate the differentiation but in this case think that Salmon might have misinterpreted the message Bernanke was trying to send. The last time I checked, the Fed was still responsible for the maintenance of stable prices. In so many words, I think that he told the assembled members of the committee that unless they brought deficits, spending and revenues into alignment they were risking an unstable fiscal situation. Though he didn’t use the “inflation” word, it was to me at least implicit in his statement.

Rather than spook the markets by throwing around the “I” word he chose Fedspeak to get his point across. The point being that the Fed would play ball up to a point but would not abandon its responsibility towards a stable price level. In effect, get your fiscal house in order because you can’t look to us to for a perpetual bailout.

Kind of as an aside here, but it occurred to me in reading his testimony that he might be seeing something in the numbers that leads him to believe that the Fed’s ability to control interest rates is limited. The current run-up in rates and overall skittishness of the bond market has confounded most observers. It’s entirely possible that the intelligence he’s receiving indicates that the markets just aren’t going to accept a continuation of the status quo for long. I’m speculating so feel free to throw your own thoughts at me.

Bottom line, though it might have read like Bernanke was trespassing on others ground, I don’t think that was his intent. I do think it was meant to send a message that most on Capitol Hill and in the administration would rather not hear. If you want to get really conspiratorial, he may have been doing the bidding of the administration and plowing the ground for some sort of policy shift. Higher taxes, maybe?